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ECONOMY

German industrial output plunges

German industrial output in July slumped 1.8 percent from June, more than three times the downturn analysts had expected, underscoring the chance that Europe's biggest economy could be in recession, official figures showed Friday.

German industrial output plunges
Photo: DPA

Economists polled by Dow Jones Newswires had forecast a drop of just 0.5 percent. “This clearly increases the probability that real GDP (gross domestic product) has contracted in the third quarter, too, meeting the oft-applied definition of a recession,” said Commerzbank analyst Ralph Solveen.

The German economy contracted 0.5 percent in the three months to June. The economy ministry also revised its initial industrial output estimate for June lower, reporting a gain of 0.1 percent on a monthly basis rather than 0.2 percent as announced originally.

July’s drop was thus the fourth in five months, Capital Economics economist Jennifer McKeown said. She noted too, that “the annual rate has fallen to minus 0.6 percent, marking the first time that production has contracted on an annual basis in nearly five years.”

In July, industrial and construction sector output fell 2.0 percent, while the volatile energy sector posted growth of 1.2 percent. Within the industrial sector, manufacturers of machine tools and other capital goods reported a drop of 3.7 percent.

“German industry is now facing increasing difficulties in its non-eurozone capital goods markets, which had remained relatively resilient so far,” said UBS economist Martin Lueck.

The ministry also calculates a two-month sliding average to smooth out exceptional movements and this showed that overall output in June and July had fallen by 1.7 percent from the level in April and May.

Industrial orders, meanwhile, fell in July for a record eight month in a row, official figures showed on Thursday, losing 1.7 percent compared with June.

“The situation in the industrial sector will not improve anytime soon,” said Alexander Koch at UniCredit Markets. “We rate the chances as high that the German economy will slide into a technical recession.”

Both Solveen and Koch said there was no chance the downward trend would improve in the coming months. But McKeown added that “one possible source of comfort is that the government claims that the latest figures have been distorted by workers taking extra days off around the school holidays.”

Lueck’s opinion was that “this downturn will probably turn out to be less painful for the German economy than the last recession in 2002-03.”

ECONOMY

German consumer prices set to rise steeply amid war in Ukraine

Russia's war in Ukraine is slowing down the economy and accelerating inflation in Germany, the Ifo Institute has claimed.

German consumer prices set to rise steeply amid war in Ukraine

According to the Munich-based economics institute, inflation is expected to rise from 5.1 to 6.1 percent in March. This would be the steepest rise in consumer prices since 1982.

Over the past few months, consumers in Germany have already had to battle with huge hikes in energy costs, fuel prices and increases in the price of other everyday commodities.

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With Russia and Ukraine representing major suppliers of wheat and grain, further price rises in the food market are also expected, putting an additional strain on tight incomes. 

At the same time, the ongoing conflict is set to put a dampener on the country’s annual growth forecasts. 

“We only expect growth of between 2.2 and 3.1 percent this year,” Ifo’s head of economic research Timo Wollmershäuser said on Wednesday. 

Due to the increase in the cost of living, consumers in Germany could lose around €6 billion in purchasing power by the end of March alone.

With public life in Germany returning to normal and manufacturers’ order books filling up, a significant rebound in the economy was expected this year. 

But the war “is dampening the economy through significantly higher commodity prices, sanctions, increasing supply bottlenecks for raw materials and intermediate products as well as increased economic uncertainty”, Wollmershäuser said.

Because of the current uncertainly, the Ifo Institute calculated two separate forecasts for the upcoming year.

In the optimistic scenario, the price of oil falls gradually from the current €101 per barrel to €82 by the end of the year, and the price of natural gas falls in parallel.

In the pessimistic scenario, the oil price rises to €140 per barrel by May and only then falls to €122 by the end of the year.

Energy costs have a particularly strong impact on private consumer spending.

They could rise between 3.7 and 5 percent, depending on the developments in Ukraine, sanctions on Russia and the German government’s ability to source its energy. 

On Wednesday, German media reported that the government was in the process of thrashing out an additional set of measures designed to support consumers with their rising energy costs.

The hotly debated measures are expected to be finalised on Wednesday evening and could include increased subsidies, a mobility allowance, a fuel rebate and a child bonus for families. 

READ ALSO: KEY POINTS: Germany’s proposals for future energy price relief

In one piece of positive news, the number of unemployed people in Germany should fall to below 2.3 million, according to the Ifo Institute.

However, short-time work, known as Kurzarbeit in German, is likely to increase significantly in the pessimistic scenario.

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